The S&P 500 officially slipped into correction territory on Friday, October 27, 2023, falling 10.2 percent from its recent high. A “correction” is defined by a drop of 10 percent or more in price. When those drops hit 20 percent, they are called “bear markets.” I expect this dip to be a correction and not a resumption of the bear market.
How many more days must investors endure before they can expect a turnaround? And what will it take to spark a rally? Sometimes, the market turns around on the news; sometimes, on price.
According to Yardeni Research, on average, a double-digit decline in the S&P 500 occurs every 1.85 years. The average duration of those double-digit declines was 188.6 days (about six months). If you remove the dot-com bubble and the Great Financial Crisis, the average correction lasts about 74.3 days (about 2.5 months). (The median correction lasts 97 days.)
From the recent peak of July 31, 2023, it took 88 days to hit correction territory on October 27. That day, the S&P 500 broke below its 200-Day Moving Average (DMA).
In my August 28, 2023, column, “The Stock Market will Drop Further but Ride it Out,” I predicted that the S&P 500 could test its 200-DMA before the market would resume its upside trend because I could not answer the question “What makes the stock market go up next?” At least one answer to the question would end up being lower stock prices. In addition to the four reasons I cited for the stock market to rally into year end (earnings, inflation, interest rates, and excessive bearishness), we have gotten that price readjustment. Therefore, I don’t expect that this correction is the start of a new bear market.
Assigning a specific date to when the stock market correction will turn around would be a wild guess. Fortunately, I make wild guesses all the time. I offer two possibilities.
First, the bottom is in.
Second, the correction could last until November 17, 2023 and drag the S&P 500 down to 3,891 points.
I give each possibility roughly 42/42 odds—which is like 50/50 odds, except modified to address recession concerns.
There is a 16 percent chance that the index will fall greater than 15.2 percent. Sixteen is the percentage of calendar years in which the U.S. economy has experienced a recession.
That date (November 17) and price level (3,891 points) may have been drawn up on the back of an envelope, but I assure you that neither was pulled out of thin air.
November 17, 2023 is the end date of the U.S. government’s continuing resolution that allowed it to avert a shutdown. I could see the stock market selling off into that uncertainty.
The median correction drags the S&P 500 down 15.2 percent, putting the index at 3,891 points, or six percent lower than when it hit correction territory.
This 10 percent correction is the fourth since the index’s January 2022 peak. Each of those corrections occurred within a span of 10 months, ending in a peak-to-trough decline of 25 percent in October 2022. After a sell-off like the one we are enduring, bullish technicians want to see the S&P 500’s 10-day advance/decline line reach oversold levels. However, despite an abundance of negative stock market sentiment, there has not been a commensurate capitulation by investors acting on those feelings by bailing out of stocks.
A new recession schedule
In October 2022, Bloomberg assigned a 100 percent probability of a recession in the next 12 months. (In January 2023, Bloomberg doubled down on that prediction.) Those 12 months passed, and instead of an economic downturn, the U.S. economy grew by 4.9 percent in the last quarter.
It is not my intention to specifically highlight Bloomberg. Instead, I refer to the well-known organization because their economic sentiment captured the zeitgeist of economists. And households. And pundits. Seemingly everyone. A glance at history would have told the prognosticators that they were too early in their timing calls.
The Federal Reserve started to fight inflation in March 2022 by initiating its interest rate-hiking campaign. Due to rising uncertainty related to wars and government funding, and because higher long-term interest rates have done some of the Fed’s work for it, the bank decided to pause raising interest rates at its November 1, 2023, meeting.
We won’t know, except in hindsight, when the last Fed hike occurred. However, I expect that the last interest rate hike by the Fed for this cycle was in July 2023. Since 1981, the historical delay between the final rate increase of a hiking cycle and the start of the next recession has been 11 months. That would place the next recession starting in June 2024.
I had previously submitted that March 2025 might be the start date of the next U.S. recession. I have also offered that it would be ridiculous if I believed I could be so precise. The point isn’t the calendar; the point is that even though the Fed has stopped raising rates, there are obstacles—if not landmines—ahead for the stock market. Like the Fed says, I, too, am data dependent. But based on current data, I have not ruled out fading any year-end rally of the stock market.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
